A worker inspects lumber on a conveyor belt at West Fraser Pacific Inland Resources sawmill in Smithers, B.C., on Feb. 4, 2020.JESSE WINTER/Reuters
Canada’s lumber and paper-products companies are expected to make significant acquisitions this year, or become takeover targets, as surging commodity prices drive industry consolidation. In the wake of West Fraser Timber Co. Ltd.’s well-received $4-billion acquisition of Norbord Inc. , which closed in January, analysts and bankers predict domestic players such as Canfor Corp. will buy rivals, while familiar names such as 173-year-old Domtar Corp. may be snapped up.
“Given that most wood product companies now carry strong balance sheets and surplus cash, we expect that management teams have been actively looking for areas in which to invest,” said analyst Paul Quinn at RBC Capital Markets in a recent report.
The cyclical North American forest products industry is currently on an upswing, driven by increasing home construction and strong demand for pulp and paper products. Against this bullish backdrop, Vancouver-based West Fraser’s share price has increased by 34 per cent since November, when the company announced a friendly takeover of Norbord.
The surge reflects the fact that “West Fraser will benefit from increased scale, greater diversification, synergies … as well as an enhanced market capitalization and trading liquidity,” Scotia Capital analyst Benoit Laprade said in a recent report. The same dynamics are expected to drive takeovers among West Fraser’s competitors.
For example, RBC’s Mr. Quinn said in a recent report that Vancouver-based Canfor, which has a $3.5-billion market capitalization, could bid for regional rival Interfor Corp. , a B.C. lumber company worth $1.9-billion, or pulp producer Mercer International Inc., which trades on the NASDAQ exchange and has a US$900-million capitalization.
Alternatively, Canfor could buy up the 45-per-cent public stake in Toronto Stock Exchange-listed subsidiary Canfor Pulp Products Inc., which has a $630-million capitalization, Mr. Quinn said. Canfor owns 55 per cent of the company. In recent investor presentations, Canfor noted it has more than $1-billion of capital available in cash and credit lines.
Domtar, on the other hand, is seen as a potential target after simplifying its structure by selling its personal-care unit for US$920-million in January. The company, run from Montreal and Fort Mill, S.C., has a $2.5-billion market capitalization and is now focused on producing paper and packaging products such as containerboard.
Domtar is viewed as an attractive acquisition candidate given its relatively low valuation, Mr. Quinn said in a report, highlighting two U.S. rivals, Packaging Corp. of America and Westrock , as potential suitors. Both are four times larger than Domtar.
Size counts in the pulp and paper industry because many companies face significant costs as they repurpose plants to meet shifting customer needs. “COVID-19 has accelerated the decline in graphic paper demand, which could leave what are otherwise quality assets without a market to supply” Mr. Quinn said. “We expect that this will result in the current owners looking to convert those assets to products with a more certain future; for those without the financial capacity to undertake a conversion project, we expect that M&A could help to unlock the full value of the paper mills.”
In a sign that forest products is now a global business, in listing potential bidders for Domtar, Mr. Quinn said “a dark-horse buyer could be Nine Dragons Paper, given the company’s history of converting paper machines to containerboard and need for fiber to supply its Chinese paper manufactures.” Mr. Quinn said Nine Dragons could also bid for the paper division of Resolute Forest Products, a deal that would be worth about $350-million for the Montreal-based company.
Hong Kong-based Nine Dragons has a $10-billion market capitalization and has snapped up paper mills in Wisconsin, Maine and West Virginia over the past three years.
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